Saudi petchem makers mull price hikes as ethane costs rise

DHAHRAN, Saudi Arabia (ICIS)–Saudi Arabia’s petrochemical producers are mulling price hikes to pass on higher ethane costs this year, but are worried over losing market share to their Asian counterparts, industry sources said on Wednesday.

In late December 2015, the Saudi government hiked the prices of ethane – the country’s main feedstock for petrochemical production – to $1.75/million British Thermal Units (MMBtu) from $0.75/MMBtu.

The magnitude of price hike was even a point of contention after government-linked media organization Saudi Press Agency put the new ethane prices at $1.57/MMBtu.

A Riyadh-based petrochemical supplier said: “We are not sure if it is $1.57/MMBtu or $1.75/MMBtu. A typo could be causing this confusion!”

Gas prices in Saudi Arabia were also raised to $1.25/MMBtu from $0.75/MMBtu.

Major Saudi petrochemical firms indicated a low- to mid- single-digit increase in annual production costs starting 2016 after the government announced the upward adjustment in energy prices and electricity tariffs.

SABIC, which the country’s biggest petrochemical producer, estimated a 5% increase in its annual costs before minority interest.

“We are reviewing the implications of passing on our higher ethane costs by raising our offers in markets we are selling to,” a Saudi polymer supplier said.

Petrochemical producers are “weighing the pros of raising offers and cons of being priced out altogether”, a second Saudi-based source said.

Asian petrochemical makers can afford to boost production and offer lower prices to export markets given the declining costs of their main feedstock naphtha, whose prices have been tracking the slump in crude values.

Oil has shed nearly 70% of its value since the second half of 2014, hitting Saudi Arabia hard, as the country is the world’s biggest oil exporter and is the de facto head of oil cartel OPEC.

Gulf producers are concerned that crude prices would continue falling throughout 2016, as the market will get fresh supplies from Iran as economic and financial sanctions against the country were lifted over the weekend.

After news of the lifting of sanctions were announced, Iran said it plans to increase its oil production by 500,000 bbl/day almost immediately, exerting downward pressure to an already oversupplied global crude market.

Falling crude prices would translate to a further erosion of the fiscal balance of Saudi Arabia, which relies on the oil and gas sector for about 85% of its export revenues. The sector accounts for half of the country’s GDP, according to OPEC.

Last year, Saudi Arabia’s budget deficit ballooned to $98bn from $39bn in 2014 as a direct consequence of plunging oil prices.

Along with other petrochemical producing countries in the Middle East, Saudi Arabia has long enjoyed low-cost production for petrochemicals as its facilities run on cheaper gas instead of naphtha, but this is no longer the case, industry sources said.

“The Saudi cost advantage still exists but is significantly eroded with the new government hike,” a source close to an Omani petrochemical company said.

Saudi Arabia’s gas reserves are being depleted, partly since low prices in the past have led wasteful consumption, industry sources said.

Previous efforts to raise ethane prices in line with the international markets were met with strong resistance from energy companies in the country.

The country’s hiked ethane prices are still well below the US’ $2.097/MMBtu as of 15 January, according to ICIS data. Ethane demand from US petrochemical plants is steady so far in 2016, with no major start-ups or outages.

For now, Saudi Arabia’s domestic natural gas requirements can be sufficiently covered by its own production but its consumption is likely to surge with the expected start-up of a new world-scale petrochemical complex in Jubail.

The complex operated by Sadara Chemical – a joint venture between Saudi Aramco and US’ Dow Chemical – has 26 units and is expected to produce about 3m tonnes/year of various petrochemical products, including performance plastics.

“Gas for Sadara has been allocated but the new complex will test Saudi’s capability to supply ethane consistently to everyone,” a source from a Saudi energy company said.

Sadara’s Jubail facility, however, was designed such that it can run more than half on naphtha as an alternative feedstock for production, in line with Saudi Arabia’s pursuit of feedstock diversity to keep its petrochemical industry competitive.

With cost of production falling and margins improving in Asia because of slumping crude, regional petrochemical suppliers can afford to boost output and cut export prices, in stark contrast to Saudi producers, which are keen to hike prices to pass on higher ethane costs.

“Asians producers mostly operate [their crackers] using naphtha, and can offer attractive prices to gain market share,” a source from a US-based petrochemical distributor said.

For most of 2016, the price spreads between naphtha and monomers, such as propylene and ethylene, are expected to be around $400/tonne, an Asian based petrochemical trader said.

“With increased supply and competition, Saudi producers may not be able [to increase] prices,” a Dubai-based trader said.

Focus story by Muhamad Fadhil

Additional reporting by Pearl Bantillo